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109 U.S.

522
3 S.Ct. 315
27 L.Ed. 1018

THOMAS, Trustee,
v.
BROWNVILLE, FT. KY. & PAC. R. CO. and others.1
December 10, 1883.

Wm. M. Ramsey, for appellant.


J. H. Broady, for appellee.
MILLER, J.

This is an appeal from a decree of the circuit court for the district of Nebraska
dismissing appellant's bill for a foreclosure of a railroad mortgage. The
mortgage was made by the Brownville, Fort Kearney & Pacific Railroad
Company to secure the payment of bonds issued by said company to certain
persons who had contracted to build its road, and to whom 610 of said bonds of
$1,000 each had been delivered. There was a default in the payment of these
bonds. After they were executed and delivered the Brownville & Fort Kearney
Railroad Company became consolidated under the laws of Nebraska with the
Midland Pacific Railroad Company, under the new name of the Nebraska
Railway Company. In the bill of foreclosure both these companiesthat is, the
Brownville Company and the Nebraska Company are made defendants, and an
answer confessing plaintiff's right to relief being filed, the court rendered a
decree of foreclosure, and apparently a sale was had. But at this stage of the
proceedings certain parties interested as stockholders of the original Brownville
& Fort Kearney Company were permitted to make themselves defendants, and
the first decree was vacated. These parties set up by way of answer and crossbill that the contract for the construction of the road, on account of which the
bonds were issued, was fraudulent and void, and so were the bonds issued
under it, and they resisted the foreclosure of the mortgage on that account.

The fraud charged in this answer and cross-bill is founded on two allegations:
First. It is alleged that two of the board of directors who took part in making
the construction contract were interested with the other parties in the contract.

Second. That the other contractors besides these two made an agreement, at the
same time that the construction contract was made, with 12 of the shareholders
of the railroad company, that they would relieve them, as subscribers to the
stock of said company, from the payment of any further assessments upon the
stock which they had subscribed for, by paying out said stock and having same
assigned to them; in all, not to exceed $16,500 of the $41,000 of individual
subscriptions to said company. The names of the persons thus relieved by the
construction company included all the directors of the railroad company at the
time the contract for construction was made. As the stock was worthless, and
these parties were liable to be called on to pay up this $16,500, the effect upon
the directors in making a construction contract with the men who relieved them
of their liability, two of them being also parties in the construction contract, is
readily seen. These allegations are proved beyond question, and the circuit
court held the contract void, and the bonds issued in fulfillment of it also void,
and dismissed the bill. We concur with the circuit judge that no such contract as
this can be enforced in a court of equity where it is resisted and its immorality
is brought to light. But as this court said in the case of Twin Lick Oil Co. v.
Marbury, 91 U. S. 587, such contracts are not absolutely void, but are voidable
at the election of the parties affected by the fraud. It may often occur that,
notwithstanding the vice of the transaction,namely, the directors or trustees,
or a majority of them, being interested in opposition to the interest of those
whom they represent, and in reality parties to both sides of the contract,that it
may be one which those whose confidence is abused may prefer to ratify or
submit to. It is therefore at the option of these latter to avoid it, and, until some
act of theirs indicates such a purpose, it is not a nullity.
3

In the present case the stockholders of the corporation, whose officers accepted
those benefits at the hands of the parties, with whom they were, in the name of
the corporation, making a contract for over a million of dollars, do denounce
and repudiate that contract. The conduct of these directors is utterly
indefensible. The case of Wardell v. Union Pac. R. Co. 103 U. S. 651, is in
precise analogy to this. See, also, same case in 4 Dill. 330. The original contract
being such that the contractors can maintain no suit on it, the bonds which they
received are affected with the same vice, and cannot be enforced unless they
are negotiable instruments in the hands of innocent holders for value. This
principle is set up and relied on to reverse the decree, on the ground that the
bonds are in the hands of the Burlington & Missouri River Railroad Company.
This company is no party to the suit, but it appears in evidence that, while it has
possession of these bonds, it did not receive them by any purchase in the
ordinary course of business. They came into their possession as part of a
transaction in which they purchased the consolidated Nebraska Company's
railroad, and these bonds were probably taken as security against their being

used to injure the title. It is also shown that, as further security in the same
direction, the Burlington & Missouri Railroad Company yet retains $400,000 of
the price of the road, which they agreed to pay. Under these circumstances we
do not see that that company is in condition to avail itself of the doctrine of
bona fide holders for value.
4

But we are asked to reverse the decree so far as to permit the trustee in this case
to recover such a sum as the construction company actually earned in building
the road. The matter was referred to a master, who, on this hypothesis, reported
that the contractors had done work for the railroad company, which it had
accepted, to the value of $205,947.66 beyond what they had received payment
for, except as it was paid by these bonds. He also reported that this work was of
that much advantage to the company, and its value or cost is estimated as on a
quantum meruit, without regard to the prices fixed by the contract. We are of
opinion that appellant's view of this part of the transaction is sound. The bonds
and mortgage in the hands of the trustee were issued in payment for this work.
To the extent of $205,947.66 the consideration is good, and no sound principle
is seen on which they cannot to that extent be enforced. To this extent they do
not rest on the original contract, but on work, labor, and material actually
furnished to the company and received by it. These services and materials are
not estimated by the prices named in the contract, but by their real value to the
company.

In the analogous case of Wardell v. Union Pac. R. Co. 4 Dill. 339, the circuit
court, after rejecting the fraudulent contract on the same grounds that we reject
this one, said:

'By what rule shall we measure Mr. Wardell's rights? He has spent time and
labor and money in discovering the mines, and in placing them in condition to
be profitably worked. * * * Apart from the contract, and if it had never existed,
he is entitled to a fair and reasonable compensation for his labor and time and
skill. The fraud gives the railroad company no right to these without just
compensation.'

This ruling was affirmed in this court on appeal in the same case. 103 U. S.
659. See, also, Gardner v. Butler, 30 N. J. Eq. 702.

There is another principle of equity jurisprudence which leads to the same


conclusion. The stockholders who have resisted complainant's claim were not
parties to the original suit for foreclosure, nor were they either necessary or
proper parties as the case then stood. The decree and sale were made in a suit

where all the usual parties to such a suit were agreed. These stockholders had
no legal right to interfere. It was only by permission of the court that they were
allowed to come in and contest the validity of the mortgage. In doing this they
became actors. They filed their cross-bill. In this condition of the case they are
amenable to the rule that they who seek equity must do equity. It is just that
they should pay a fair price for what they have received; that this mortgage,
given for the construction of the road, though excessive by reason of the fraud
in the contract, should stand for the reasonable value of what the company
actually received in the way of construction. To permit these intervenors to
defeat the mortgage on any other terms would be unjust, and would make the
court the instrument of this injustice.
9

The decree of the circuit court must therefore be reversed, and the case
remanded to that court, with directions for a decree in favor of the plaintiff for
the sum of $205,947.66, with interest. If a sale becomes necessary this sum
must be paid out pro rata on the bonds secured by the mortgage, on their being
produced and canceled, or surrendered for cancellation, provided the road sells
for so much.

10

Mr. Justice FIELD and Mr. Justice MATTHEWS took no part in the hearing or
decision of this case.

S. C. 2 Fed. Rep. 877.

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